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Japan’s economy unexpectedly shrank for a third
straight time in the Q4 (last quarter) of 2012 as falling exports and a business
investment slump outweighed improved consumption. The report coincides with
vigorous efforts by the new government of Prime Minister Shinzo Abe to boost
economic activity and end deflation. The yen has fallen about 20% against
the US dollar since last September.

Gross domestic product (GDP) contracted an
annualised 0.4%, following a revised 3.8% fall in the previous quarter, the
Cabinet Office said in Tokyo today.

Bank of Japan's governor Masaaki Shirakawa
and his colleagues raised their assessment for the economy today but they left
monetary policy unchanged. Last month the BOJ, under pressure from Abe, set a 2%
inflation target with no deadline and said it would start open-ended asset
purchases in 2014.

The central bank
said [pdf] today: "Japan's economy is expected to level off more
or less for the time being, and thereafter, it will return to a moderate
recovery path as domestic demand remains resilient partly due to the effects of
various economic measures and overseas economies gradually emerge from the
deceleration phase."

In the three-month period, exports fell 3.7% - -
the second straight quarter of decline -- and slumped in the seven months
through December as Europe’s recession coupled with the East China Sea islands'
dispute with China, cut shipments. Net exports contributed a 0.2
percentage point to the contraction.

A 0.4% on-quarter rise in private consumption,
which accounts for more than half of GDP, was not sufficient to avert a
contraction even as colder-than-usual weather spurred sales of winter clothing
and other items.

Business investment dropped 2.6% from the
previous quarter, the fourth consecutive drop in capital spending, even as some
companies said their earnings outlook is improving due to the weaker yen.

The Diet is considering new stimulus measures
that have been proposed by the government.

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